Q2 2020 Earnings Call
And is about to begin.
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Good day, everyone and welcome to the American software second quarter fiscal year 2020 preliminary earnings results call. At this time all participants are in listen only mode. Later, you'll have the opportunity to ask questions. During the question and answer session. You may registered to ask a question at any time by pressing the star and one.
On your telephone keypad. Please note this call may be recorded and I will be standing by if you shouldn't need any assistance.
Now my pleasure to turn todays conference over to Vincent the cleanest Chief Financial Officer up American software.
Thank you David and a good afternoon, everyone and welcome to American software second quarter fiscal 2020 earnings conference call on the call with me as Allan Dow President of American software I will review the numbers and then Alan will give some remarks after that but I would like to remind you that this conference call may contain forward looking statements, including statements regarding among other things.
Our business strategy and growth strategy.
Any such forward looking statements speak only as of this date. These forward looking statements are based largely on our expectations and are subject to a number of risks and uncertainties some of which cannot be predicted or quantified and our beyond our control future developments and actual results could differ materially from those set forth in contemplated by or underlying the forward looking stay.
I meant.
There are number of factors that could cause actual results to differ materially from those anticipated by statements made on this call. Such factors include but are not limited to changes and uncertainty in general economic conditions the growth rate of the market for our products and services the timely availability in market acceptance of these products and services, the effective competitive products and pricing and.
Our competitive pressures and the irregular and unpredictable pattern of revenues in light of these risks and uncertainties there could be no assurance that the forward looking information, we will prove to be accurate.
So taking look at the second quarter fiscal 2000 at the same period last year total revenues increased 1% to 28.2 for the current quarter compared to 28 million same period last year.
Subscription fees increased 64% to 5.5 million for the quarter compared to 3.3 for the same period last year, while our software license revenues decreased 48% to 1 million for the current color compare to 2 million in the prior year period.
Period, as we continue to transition to the SaaS engagement model.
Our cloud services annual contract value or HCV increased by approximately 55% to 22.4 million for the current quarter and that compares to 14.5 for the same period last year, our professional services and other revenues decreased 2% to $10.8 million for the current quarter compared to 11.1 million for the same.
Quarter last year, and that's primarily due to a degree decrease in our IP consulting business unit. The proven method as a result of timing of project work. This was partially offset by a 16% increase in our supply chain management unit due to stronger bookings in recent quarters and our backlog.
Remained solid heading into Q3.
Maintenance revenues decreased 7% to 10.8 million compared to 11.6 million due to normal retention fall off combined with lower license fees in recent quarters.
Our combined recurring revenue streams of maintenance and cloud services were 58% of total revenues for the current quarter and that compares to 53% from the same period last year.
Looking at cost or overall gross margin was 54% for the current quarter compared to 52% in the same period last year. Our license fee margin was 4% in the current quarter compared to 13% in the same period last year, that's primarily due to lower license fee revenue.
Compare and with a relatively fixed costs related to non cash amortization of cap software and intangibles from recent acquisitions.
Our subscription fee margins decreased to 52% compared to 61% for the same period last year and that's primarily due to increases in the allocation of amortization of cap software, which is 1.2 million or 46% of the totaled 2.2 point 6 million in costs due to increase in subscription revenue more revenue gets.
Allocated to subscription margins.
The second quarter 20, gross margin without noncash cap software allocation would have been 73% compared to 70% in the same period last year.
Our service margin increased to 30% compared to 27% in the same period last year and Thats due to a higher portion of professional services revenue coming from our higher margin supply chain business.
Which were had margins of 37% comparative 28% in same period last year.
Maintenance margin increased to 83% for the current quarter compared to 81% in the same period last year and thats due to cost containment efforts.
Taking a look at operating expenses, our gross R&D expenses were 17% of total revenues for the current.
Period compared of 16% the same period last year as a percentage of revenue sales and marketing expenses were 18% of revenues for the current quarter compared to 19% for the from the prior year.
And that's primarily due to timing of marketing related costs.
<unk> expenses were 17% of total revenues for the current period compared to 16% from the prior year quarter.
And that's primarily due to increased variable compensation and to a lesser extent insurance and legal fees.
So our operating income decreased 40, 45% at 843000, this quarter compared to 1.5 million in the same quarter or a year ago, adjusted EBITDA, which excludes stock based compensation decreased 9% to 3.5 million for this quarter compared to three point.
Excuse me 3.5 compared to 3.9 same period last year.
GAAP net income increased 42% to $1.8 million or earnings per diluted share five cents.
For the core current quarter and that compares to net income of 1.2 or four cents earnings.
Per diluted share adjusted net income was 2.5 or adjusted earnings per diluted share of eight cents for the second quarter and that compares to net income of 2.2 or adjusted earnings per diluted share of seven cents for the same period last year and these adjusted numbers exclude amortization of intangible expense related to acquisitions and stock based compensation expense.
Both GAAP and adjusted net income included discrete tax benefit of for approximately 400000 this quarter associated with the exercise of employee stock options, while we continue and anticipate a normal tax rate effective rate of approximately 13% on the balance of the year future option exercise may continue to affect.
As reported tax rate.
International revenues this quarter were approximately 19% of total revenues compared to 20% in the same period last year.
Taking a look at the year to date numbers for the six month ended October 31, 2019 year to date, we were 55.6 million compared to 55.4 million.
Subscription fees were $10 million year to date, 53% increase compared to 6.5 million. The same period last year, while software license revenues were 2.8 or 24% decrease compared to 3.7 in same period last year and again, reflecting our continued transition to the SaaS engagement model.
Services revenue decreased 5% to 21 million year to date compared to 22.1 million and.
Last year due to lower revenue at the proven method. This was partially offset by a 9% increase at our supply chain business unit.
Maintenance revenues decreased 6% year to date to 21.9 million and that compares to 23.1 million year to date last year.
Taking a look at costs. Our overall gross margin was 54% for the current year to date period compared to 51%.
License fees increased to 15%.
Gross margin compared to 6% year to date.
And.
Gives me subscription.
Fee gross margin decreased to 52% year to date compared to 64% in same period last year and that's due to increase in allocation of amortization of cap software costs. Our gross margin was 29% year to date compared to 24% same period last year and Thats due to increased service revenues coming from our higher margins supply chain management.
Unit.
Our maintenance margins are 83% year to date compared to 81% same period last year due to cost containment efforts.
Our gross R&D expenses were 17% of total revenues for the year to date compared to 16% same period last year as a percentage of total revenue sales and marketing expenses were 19 for the both the current and the same period last year DNA expenses were 18% of revenues for the current year to date period compared to 16% same period last year. So.
Our operating income year to date decreased 23% to 1.6 compared to operating income of 2.1 last year adjusted EBITDA year to date increased 5% to 7 million compared to 6.7 million the same period last year.
Our GAAP net income increased 11% to 2.9 million or nine cents earnings related chair.
And that compares to 2.6 or eight cents, saying the same period last year.
Our adjusted net income year to date was 4.5 or earnings per diluted share of 14 cents and that compares to net income of 4.6.
Million or or 15 cents earnings per diluted share international revenues year to date were 21% of total revenues compared to 20% same period last year, taking a look at our balance sheet. The companys financial position remained strong with cash and investments of 94.7 million at the end of.
October 31, 2019, and this increased approximately 12 million since the same period last year.
During the current quarter, we paid $3.5 million dividends. Some other aspects of the balance sheet. Our unbilled accounts receivable 15.4, Unbilled to 2.7 for a total aged over little over 18 million and accounts receivable our deferred revenues current both current and long term or 32 point.
$6 million and our shareholder equity is 117.9 million.
Our current ratio was 2.7 as of October 31 to 2019 and that compares to 2.8. The same period last year. Our days sales outstanding as of October 30, Onest 2019 was 58 days.
Fair to 60 860, excuse me 66 days same period last year.
At this time I'd like to turn the call over Alan to Ellendale, but thank you Vince.
During the second quarter, we saw strong growth in our cloud revenue driven by the software as a service engagement model, which was evidenced by the 64% year over year increase in subscription revenue in the 55% growth in the annual contract value for cloud services over the prior year period.
The cloud model is our standard today, so going forward, we expect that through traditional perpetual licenses will be limited to smaller incremental expansions within the existing customer community.
This was a good quarter for customer acquisition, we added 10, new logos across 12 different countries, which brings us to 26, new customers year to date.
The annual contract value for cloud services associated with new contracts increased from 14, and a half million in Q2 of last fiscal year to 22.4 million last quarter.
We're pleased to see our growth rate in the HCV exceeded the 50% level for the second consecutive quarter.
Furthermore, we're off to a good start in the third quarter, which is traditionally our strongest quarter, having gotten to similar period behind us with the ability to leverage both the year end funding as well as the beginning of the new calendar year spending authorizations coming available.
Given our performance to date in a robust pipeline, we which includes several significant opportunities we remain confident in our ability to achieve solid eightv growth in fiscal 2008 and beyond.
Based on the close rate in Q1 in Q2, we are now operating our supply chain services organization at near full capacity, which is evidenced by the 16% growth in our supply chain services revenue.
This quarter, we will be battling the Thanksgiving and Christmas holiday period, which is a drag on the number of billable hours that are available, but we do expect to showed strong growth when compared to Q3 of last year and continued services revenue growth as we progress through the year.
During the second quarter, our recurring revenue streams for maintenance and cloud services represented approximately 58% of the total revenues as compared to 53% in the same period of the prior year due to the growth in our subscription contracts.
This trend towards a higher mix of recurring revenue is on track with our prior expectations and thus we're confident we can achieve the 60% level before the end of the fiscal year that I stated on the last call.
Obviously the growth in recurring revenue improves the financial predictability and the profitability of our company, but more importantly, it is a strong reflection of our customers belief that this business model drives higher value for them and open door opens doors for incremental expansion of our services within.
Existing customer community.
Overall, we had a very good quarter and we're pleased with our teams achievements.
Looking forward, we are continuing to see an uptick in the transformational projects, which leverage our digital supply chain solutions and take advantage of the optimization depth. The advanced analytics machine learning capabilities in the optimization optimized sold simulation capabilities of our platform.
Customers are looking for greater supply chain agility and dramatically shorter time to market for their new products as they strive for higher customer service levels to achieve and retain brand loyalty.
Ability to help them transform their supply chain to continuous and autonomous planning allows our customers to leverage their supply chain as a strategic market advantage.
In summary, we are encouraged by the progress we're making our go to market execution on these transformational projects.
We will continue to focus on making.
Customers more successful as we look to expand our relationships with existing customers in continue to expand our customer community.
As we achieved that mission, we will see an acceleration of our recurring revenue streams.
We're confident that we can continue to grow both revenue and profitability in the year ahead in our proud to be delivering incremental benefits for customers.
So David at this time, we'd like to open the call for any questions.
At this time, if you have questions. Please press the star and one keeps on your telephone keypad keep in mind, you may or move yourself from the question Keith let anytime by pressing the pound cake.
Once again, if you'd like to ask a question today. Please press the star and one keeps on your Touchtone telephone keypad.
And we'll take our first question from that found with William Blair. Please go ahead. Your line is open.
Hey, guys. Thanks for taking my questions and great job on the quarter.
Just hoping to dig into a little bit more detail on this HCV growth acceleration now two quarters in a row.
Looks pretty good what.
Any more details on specifically what is driving that acceleration and related to that.
Mac has now been and in the sales seat for.
In our roughly three fourths of a year or so is there some of the changes that he's made at the end to sales organization.
Starting to become evident and the ACB Miller.
Yeah, a couple of things will first of all we don't provide guide any specific guidance, but.
As we maintain the pace of HCV bookings over the last couple of quarters, we should be able to success sustain or accelerate that growth rate and.
Mac is having some impact we're seeing his influence on the timing of contracts being able to to get them closed a little faster and actually the scope of some of those contracts as we look forward.
The scope of the projects are starting to to increase so we're seeing some larger deals in the pipeline as we look forward. So certainly he is starting to have an influence on our on our hub.
RPL.
And what have you done.
In terms of sales capacity I guess, how is that true trended since Max been there.
We are up up a couple a head count we've had some turnover in the time period that Max bid on board I don't attribute that specifically to him, but we've got a little bit of turnover there and we will see in the quarter forward, we have a number of offerings out and acceptances, so our headcount.
We'll grow as we look forward. So this time next quarter when we're talking I think we can.
To be able to share with you even some some additional headcount increases that there will be coming into effect them.
Got it.
And on the in terms of the mix of the pipeline.
Should we think of the pipeline now is just primarily cloud business versus license given the comments you made and and have you seen existing customers.
That a running the deal.
On premise product transition over to cloud or is it still primarily new sales that's driving to the ACB number.
As we look forward, we we're not seeing a just a lift and shift conversion of customers into the cloud. So that that's not they are what we are seeing is that as existing customers are expanding their footprint, which is a really exciting news that theyre doing that we have a number of those contracts that were in.
In the process of working our way through where they will lift and shift the existing capabilities that they have already licensed they'll move those to the cloud so we're going to.
We anticipate that looking forward, we will see some lift and shift those some conversions, but they will be primarily driven by expansion projects that are bringing that lift and shift with it so there'll be a bit bit of a mix in that in that flavor in but not just a lift and shift we're not seeing that we are still.
Being that the pipeline as we look forward is.
Substantially all subscription.
With the exception as I said that.
The small incremental add ons are.
If they've got an existing perpetual license and they're doing a small add on they'll probably stay in that model does not converges for that purpose.
Other than that I think would be something exceptional that may drive a transaction towards the license fee, but we're not even see not at this point.
Got it.
Last one for me.
One of your on your comment last comments was on.
Cloud opens the door for incremental expansions within customers with some of the early cloud customers that you've had how how have those expansions.
Progressed, and I guess, what's typically the catalyst for.
Customer due to expanded the scope of their engagement with you.
Some of the earlier ones, where we're doing projects on an incremental basis. So they they anticipated a larger scope and now we're moving into phase two of the deployment, where they're coming back and adding to the second tier or second phase of that implementation.
In a few cases, there was actually new functionality that they've that we brought to market, where they are actually expanding as well into that area. So that's that that has been incremental for us in some areas one of the other.
Influences that Mac has had on us is to actually structure projects. Some of the more transformational projects are structured around.
Tier deployments, so they're actually committing upfront so in a few of those contracts may.
They play out it may take longer for us to move to accrue phase two because the phases have been built them.
But that's a bit of a contrast to the way our experience was at the beginning of our.
Subscription experience, where where the customer was taking the first bite and then they wait for the second bite until they finished the first one and then they would step up to the for the second one so we're still seeing some of that but.
But these transformational projects theyre, they're looking at.
The whole project in its entirety and looking at Hadaway phase those together.
Great. That's it for me guys. Thanks, a lot.
Hey, Matt Thanks for the questions.
As a reminder to ask a question today. Please press the star and one keys on your telephone keypad, we'll take our next question from Zach Cummins with B. Riley FBR. Please go ahead. Your line is open.
Hi, Good afternoon Allen events, Thanks for taking my questions.
I guess it wasn't actually so you kind of the thawed rebound there in the professional services team for supply chain management and sounds like you have a pretty solid backlog going into Q3.
How are you feeling about the capacity you have or the number of head count that you have to service that backlog as we move forward going here.
A couple of things are in play there we have.
Because of the backlog, we have actually expanded the team and we've been able to pull in some very.
Solid talent to help us in a variety of areas. We've actually also redeployed some resources in areas that are stronger than maybe in other areas and we've also been able to leverage from third parties to help us with that backlog as well and bringing them into the mix, which is always an a nice mix as well we build we build the ecosystem.
When we build their knowledge base. They in turn go on and create additional demand for us out there so that combination of resources of being able to expand our team flex our team and leverage third parties has been really positive influence and right now we're servicing the projects at the level that we need to be servicing them.
So we're running at the pace at the customer deployment model allows we're not constraining that.
Model at this point.
We do see and continue to build and we'll look to leverage all three strings, there a pull the resources or whatever direction, we need to make sure. We're servicing the customers in capitalizing on that revenue opportunity for us in them.
I understand that's helpful. In in terms of the sales team and sounds like there is a little bit of turnover, but it sounds like you do have some new people coming into the door. There I mean, how are you feeling currently about the ability to service your large pipeline of opportunities and what really is the expected ramp up time for some of these expected new hires.
It what's exciting about right now is is we're a known commodity in the marketplace Theres. This uptick the positive results that were showing our really making us attractive for people that understand our industry and know the no. The market. So the ramp up time for them is pretty efficient right now we're seeing some good productivity.
Out of the the people that started just a few months ago.
They're not closing transactions, yet, but there are active there productive they're working transactions.
Executing sales strategy. So we feel good about the headcount adds that we've made.
Those that are on board, we feel really good about the folks that are we're anticipating to join us here in the coming weeks.
So I think the ramp up time is going to be even faster with this pool resources than we experienced in years past.
I understood and then just kind a final question for me you and when thinking about the current macro environment. How are you viewing customer spending trends compared to say this time 12 months ago.
It's settled dramatically I think 12 months ago, we were seeing some severe influence on the macro behaviors out there.
Now that said still.
People got a watchful eye out into what's going on but it's not a it's not a reason that we're seeing right now.
I think one of the other challenges we face is the as the deal size grows those just getting the overall approval on a larger transaction is a little more complicated and sometimes can be protracted.
But the pace at which were getting through those today is much better than we were 12 months ago.
Understood well, thanks for taking my questions and especially at the upcoming quarter.
All right Jack Thanks for joining us.
And once again, if you would like to ask a question. Please press the star and one keys on your telephone keypad.
We could pause for a moment to allow further questions to Q.
And there are no further questions on the line at this time, Portugal right into our speakers.
David Thank you very much.
And for all those who joined US. This afternoon. We appreciate your time and attention and look forward to speaking with you again in three months.
This does conclude today's program. Thank you for your participation and you may now disconnect.
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